Describe substantive procedures the audit team should perform to obtain sufficient and appropriate audit evidence in relation to the following three matters
Describe substantive procedures the audit team should perform to obtain sufficient and appropriate audit
evidence in relation to the following three matters
Minty Cola Co (Minty) manufactures fizzy drinks such as cola and lemonade as well as other soft drinks and its year
end is 31 December 2013. You are the audit manager of Parsley & Co and are currently planning the audit of Minty.
You attended the planning meeting with the engagement partner and finance director last week and recorded the
minutes from the meeting shown below. You are reviewing these as part of the process of preparing the audit strategy.
Minutes of planning meeting for Minty
Minty’s trading results have been strong this year and the company is forecasting revenue of $85 million, which is
an increase from the previous year. The company has invested significantly in the cola and fizzy drinks production
process at the factory. This resulted in expenditure of $5 million on updating, repairing and replacing a significant
amount of the machinery used in the production process.
As the level of production has increased, the company has expanded the number of warehouses it uses to store
inventory. It now utilises 15 warehouses; some are owned by Minty and some are rented from third parties. There
will be inventory counts taking place at all 15 of these sites at the year end.
A new accounting general ledger has been introduced at the beginning of the year, with the old and new systems
being run in parallel for a period of two months.
As a result of the increase in revenue, Minty has recently recruited a new credit controller to chase outstanding
receivables. The finance director thinks it is not necessary to continue to maintain an allowance for receivables and
so has released the opening allowance of $1·5 million.
In addition, Minty has incurred expenditure of $4·5 million on developing a new brand of fizzy soft drinks. The
company started this process in January 2013 and is close to launching their new product into the market place.
The finance director stated that there was a problem in November in the mixing of raw materials within the production
process which resulted in a large batch of cola products tasting different. A number of these products were sold;
however, due to complaints by customers about the flavour, no further sales of these goods have been made. No
adjustment has been made to the valuation of the damaged inventory, which will still be held at cost of
$1 million at the year end.
As in previous years, the management of Minty is due to be paid a significant annual bonus based on the value of
year-end total assets.
Required:
(a) Explain audit risk and the components of audit risk. (5 marks)
(b) Using the minutes provided, identify and describe SIX audit risks, and explain the auditor’s response to each
risk, in planning the audit of Minty Cola Co. (12 marks)
(c) Identify the main areas, other than audit risks, that should be included within the audit strategy document
for Minty Cola Co; and for each area provide an example relevant to the audit. (4 marks)
(d) Describe substantive procedures the audit team should perform to obtain sufficient and appropriate audit
evidence in relation to the following three matters:
(i) The treatment of the $5 million expenditure incurred on improving the factory production process;
(ii) The release of the $1·5 million allowance for receivables; and
(iii) The damaged inventory.
Note: The total marks will be split equally between each part. (9 mark
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